Termination and distribution of grandfathered DC plans

[Guest jfsinger]

In one of the Treasury teleconferences post 2005-1 I remember hearing that, after 12/31/05, the exercise of discretion to terminate a plan and distribute the assets would be deemed a material modification and thus violate 409A, even if the plan document allows for it. I've referred to my notes and my impression then was that the only allowable termination/distribution for a grandfathered plan would be under an "automatic" plan feature (i.e. financial trigger).

Since that time, another (well respected) advisor has disagreed with my understanding. Would you weigh in?

Thanks,

Joe

[Guest LeeNunn]

If a grandfathered plan includes a plan termination provision and suffers no material modifications, there should be no problem in terminating the plan. If you add a plan termination provision to an otherwise grandfathered plan, you have a material modification that subjects the entire plan to 409A. Financial triggers might be a problem even for grandfathered plans if the technical corrections legislation passes.

Distributions from plans subject to 409A must fall into one of the six 409A distribution categories, which do not include plan termination.